There has been much discussion over the effects of significantly higher costs and the impact it will have on milk production. More importantly, the impact it will have on milk prices.

Lower cheese and Class III prices compared to earlier this year have caused concern over profitability. Some input costs have declined while others remain high, or in some cases have risen. So far the effects have been varied across the country. While some producers are having difficulty keeping up with bills others are expanding.

There is some ray of hope that Class III milk prices will move back into the $20 per cwt. range sometime in the next year, but this will require a higher cheese price than last year. Cheese price will need to make up for the lower whey price, which has not recovered from the effects of record high price last year. Demand for whey dropped off when record high whey price was realized last year, and although price is currently lower the demand has not returned. In fact, price continues to weaken.

Dry whey price has fallen significantly since April 2007, when price peaked at $0.7933 per pound. The current NASS weekly price is around $0.2350 per pound. This drop of 56 cents represents a Class III price decrease of $3.36 cents per cwt. To compensate, cheese price needs to be 33 cents per pound higher to make up for the loss in dry whey price. Of course butter price has an impact on price as well, but for the sake of comparison, I am using the cheese price.

So why is the whey price so low? High price cured high price. Demand shifted away, both in human consumption as well as animal consumption. Alternatives were found, and continue to be used. Stocks of dry whey increased even when cheese production was being limited because of high milk prices. When cheese production increased this summer whey stocks continued to increase resulting in a weak market. There is no indication of tightness, and buyers are standing back making purchases only when they need to while waiting to see if price will weaken further. Dry whey price in the Western region of the country remained somewhat stronger for much of this summer, but this has changed in the past few weeks with price weakening significantly. Export sales are very slow with the lower price still not spurring much buyer interest.

Nonfat dry milk has followed a similar pattern as whey, with significantly lower price from last year in a weak market. Prices are declining and stocks are building. The nonfat dry milk price is in the mid-$1.30’s versus the high of $2.0855 per pound on the weekly NASS surveyed price. Stocks increased significantly as demand slowed and production increased due to milk being shifted over to butter/powder production. Butter demand remained strong, but nonfat demand slowed both domestically and internationally. Nonfat dry milk that has been moving to China contains a nitrate level too high to pass import inspections. This has been curtailing sales to China and has caused some load rejections. This is something that needs to be changed quickly.

The dry markets will come back in price eventually, but for the time being these markets are weak and will not be much help in boosting milk prices.

Upcoming reports to watch for are the August Monthly Milk Production report on September 18; the October advanced Class I price on September 19; the August Monthly Cold Storage report on September 22; and the August Livestock Slaughter report on September 26.

--Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their Web site at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.

Record high grain prices earlier this year as well as current high grain prices have had many analysts forecasting a tightening milk market. Some had expected milk price would reach upwards to $30.00 per cwt. before it was all said and done. However, this has not materialized and price has actually moved dramatically in the opposite direction.

For example, the nearby September Class III contract reached at high of $21.40 on May 21 and has fallen steadily to the current price at the time of this writing of $15.81. A price drop of this magnitude should have dairy producers pulling the plug and culling cows heavily. Marginal cows are generally eliminated from the herd rather than pay the high price for feeding them. An increased culling rate on USDA’s Livestock Slaughter report would indicate farmers are feeling the crunch of high feed prices and are taking one of the steps in cutting costs. High priced feed should go to high producing cows to push production as much as possible.

The latest Livestock Slaughter report showed the highest dairy cattle slaughter for the month of July since 2003. There were 209,000 head slaughtered, 28,000 head more than the previous month and 29,000 head more than the previous year. It was the highest slaughter numbers since April. However, this is not as bullish as it would seem. What seems to be happening is that lower producing cows are being culling and replaced with better cows.

The Milk Production report for July showed an increase in cow numbers by 4,000 head. Even though slaughter increased significantly, producers still added more cows than were removed. This defies the idea that culling would increase, cow numbers would decline, and milk prices would gain. The August slaughter report should again see higher culling as the CWT Herd Reduction program should reflect quite a few of the cows accepted for removal under the program. However, this may have little, if any, impact as farmers continue to add cows and replace the lower producers with better cows.

The focus for market direction needs to be shifted to commercial disappearance. Demand for dairy products has slowed and supply is readily available. Buyers of cheese do not have to chase the market to purchase what they need. Sellers are willing to come to them. There has been a lot of cheese traded on the CME Group’s cash market lately.

During the month of August, there have been 272 loads of both blocks and barrels traded representing about 10.9 million pounds. Buyers have been standing in and purchasing what has been coming. They are willing to purchase what they need at current prices rather than wait to see if it could weaken further. Time is of the essence and buyers want to get their hands on what they can now rather than wait until fall and holiday orders come through. If they waited, they may possibly have greater difficulty in obtain the desired quantities at a reasonable price. However, we need to bear in mind that the longer price remains at current level and buyers continue to purchase large quantities, the less aggressive they will need to be later in the year. This could minimize or eliminate a price increase through the end of the year.

Those who have not yet stepped up and hedged 50 percent of feed needs for next year per my last recommendation should do so. An early frost or yields not as good as anticipated could move grain prices higher quickly. The past two years had grain prices increase into harvest and then continued to increase into the planting intentions report in March. This year is shaping up to follow a similar pattern.

Upcoming reports to watch for are the August federal order class price on September 5; The July Dairy Products report on September 5; the California Class I price on September 10; The World Agricultural Supply and Demand report on September 12; and Fluid Milk sales on September 12.

-- Robin Schmahl is a commodity broker and owner of AgDairy LLC, a full-service commodity brokerage firm located in Elkhart Lake, Wisconsin. He can be reached at 877-256-3253 or through their Web site at www.agdairy.com.

The thoughts expressed and the data from which they are drawn are believed to be reliable but cannot be guaranteed. Any opinions expressed are subject to change without notice. There is risk of loss in trading and may not be suitable for everyone. Those acting on this information are responsible for their own actions.

This column is part of the Dairy Today eUpdate newsletter, which is delivered to subscribers biweekly and includes dairy industry analysis, dairy nutrition information as well as the latest dairy headline news. Click here to subscribe.